Factors to Consider When Purchasing a Business Vehicle
One of the many questions we receive from clients is, “Should my business buy a new vehicle?” Due to the Section 179 Depreciation Deduction, there are some big tax breaks in depreciation on the purchase of a qualifying “heavy” SUV, pickup, or van that is utilized 50% or more for business use. This means that purchasing a vehicle for your business could be a great financial decision. However, there are many factors to consider when deciding whether to purchase a new vehicle personally or as a company. Here are some of those factors…
What is considered personal use vs. business use of a vehicle?
The first thing you must consider is if the vehicle will be used primarily for business or personal use. Purchasing a vehicle in your company name can allow your business to deduct some of the general expenses on the cost of ownership, including:
- Gas and maintenance
- Insurance and registration fees
- Tolls and parking fees
- Interest on the vehicle loan
Personal use of a vehicle is not deductible. For instance, commuting mileage is considered personal use whereas driving from your place of business to meet with clients is considered business use. It is important to keep very sound records to establish the exact percentage of personal vs. business use while calculating expenses. You can do this through two different methods of figuring your deductible vehicle expenses: standard mileage or actual expenses. For further information on figuring your deductible vehicle expenses, read this article from the IRS (Click here to learn more about figuring your deductible vehicle expenses).
How does entity type factor into figuring deductible expenses?
Entity type can also determine what methods you will use to claim expenses.
- Sole Proprietors – You can qualify for either standard mileage or actual expenses.
- Corporations – If the vehicle is personally owned, the owner can be reimbursed based on the standard mileage. If the vehicle is owned by the corporation, the actual expense deduction will need to be used.
- Partnerships – You can still claim unreimbursed expenses on personal vehicles.
What are other factors to consider?
You’ll also want to consider the industry you’re in or the new vehicle use type, as there are some vehicles that are not deductible. Vehicles used as equipment such as dump trucks, luxury vehicles, or use-for-hire vehicles such as taxi cabs and airport transit vehicles are not deductible.
Most importantly, you’ll want to consider if your business can sustain the expense of a large purchase. Can your business obtain a commercial loan? This often depends on whether the business has been active long enough to establish good business credit, meaning rates may be lower if your personal credit is higher. The cost of insurance for the company may also increase due to the need to carry a commercial insurance policy. That said, purchasing these policies can be beneficial in some cases if you have employees driving company vehicles, as these will limit personal liability.
With so many factors to consider, we always suggest speaking with a professional to determine the right answer for you and your business. Feel free to contact us if you have any questions or would like to set up a consultation with our Business Services Team. Click here for contact information. Or click here to learn more about our Business Services.
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